Federal Privatization and the Expensive Philosophy of the Circular A-76 Process

It might be thought that, if any work in America is inherently governmental and requires such tight governmental control that it cannot be privatized, it must be the military. However, history shows otherwise. From the British use of Hessian soldiers during the American Revolutionary War up to today’s use of defense contract workers, there is a long tradition of using private contractors in the military.

For example, in recent years, military housing has been privatized, with not particularly good results. The second Iraq War was awash with contractors, who were paid billions of dollars and were part of a system of cronyism and corruption.

Daniel Gouré, a vice president of the conservative Lexington Institute, has said that the United States has created “a fifth branch of the military … called the private sector.”

Privatization in the military – in fact, privatization of government in general – has created complex problems concerning the operation of government and the roles of the private and public sectors. One important slice of that complexity involves the operation of the federal government’s Circular A-76 process. The Circular A-76 process controls the procedures used to decide whether work performed by federal employees can or should be performed by private contractors.

A Brief Overview of the History of Circular A-76

Civilian workers who are directly employed by the armed forces have long played key roles in supporting the military’s mission. However, not all civilian workers who perform work for the military are employed by the military – in part, as a result of the Circular A-76 process.

It is ironic that, while President Dwight Eisenhower, a former general, warned of the dangers of the military-industrial complex, his administration introduced concepts that eventually would become the Circular A-76 process. In 1966, as the Vietnamese conflict was under way, the Johnson administration issued a formal A-76 policy. Its core philosophy was reliance on the private sector for “commercial activities.”

Those concepts continue today, with revisions, but with no sense of irony. That is, while it is vigorous free market competition that is intended to drive quality of goods and services, the A-76 process does not require actual competition. All that it requires is relying on the private sector for “commercial activities,” that is, for performing work that could be or has been performed by the private sector, even if the provider is a monopoly.

Circular A-76 has been revised several times over the years. The 1983 Circular A-76 document, which was produced under Office of Management and Budget Director David Stockman to promote the goals of the Reagan administration, was revised in 1999 under OMB Director Jack Lew. The focus of the Stockman-Lew Circular A-76 was on deciding whether specific “commercial activities should be performed under contract with commercial sources or in-house using Government facilities and personnel.”

This interpretation of Circular A-76 abandoned the government’s responsibility to provide high-quality public goods and services. Instead, accountability to the public was measured almost solely by predicted – not actual – public dollars saved by transferring a service to a private contractor.

Beginning in fiscal year 2009, a government-wide moratorium on public-private competitions was issued. The moratorium prohibits privatizing work that was performed by civilian government employees, beginning or announcing a public-private competition, using government funds to hold public-private competitions and converting work done by civilian federal employees to contractors. Essentially, the moratorium has provided time to assess the value of privatization in the federal government. That moratorium remains in place today.

The “Drowning Government in a Bathtub” Philosophy of Circular A-76

Circular A-76 takes the position that “commercial activities” are to be performed by the private sector, rather than by public employees. However, missing from this philosophy has been any commitment to the public beyond lip service to competition and assumptions about the virtues of the private sector, solely because it is not public.

The core philosophy and operation of Circular A-76 can be found below in three paragraphs from the 1983 version. Each of these three paragraphs speaks of the many virtues of competition. However, the stated policies have been ignored regularly and even violated.

4.a. In the process of governing, the Government should not compete with its citizens. The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Government to rely on commercial sources to supply the products and services the Government needs.

5.a. Policy

Competition enhances quality, economy, and productivity. … [C]omparison of the cost of contracting and the cost of in-house performance shall be performed to determine who will do the work. When conducting cost comparisons, agencies must ensure that all costs are considered and that these costs are realistic and fair.

b. Certain functions are inherently Governmental in nature, being so intimately related to the public interest as to mandate performance only by Federal employees. These functions are not in competition with the commercial sector. Therefore, these functions shall be performed by Government employees.

It may seem reasonable to mimic free-market competition by requiring that government goods and services be provided by the lowest-cost bidder. It is certainly reasonable that, as paragraph 5.a. says, “all costs must be considered.” However, the obligation to ensure that all costs are included has most often been ignored.

In fact, the 2003 Circular A-76 revisions dispensed with the requirement for competitions in some cases, such as when privatization involved 65 or fewer full-time-equivalent employees. In that case, rather than keeping the status quo, Circular A-76 stated that the work of federal employees could be directly converted to private work with no quality or cost comparison. In addition, the likelihood that federal work would be privatized – and privatized without a cost comparison or analysis – was increased because privatizing work was an important factor in calculating federal executives’ bonuses (p.13-19).

American Federation of Government Employees attorney Diana Price argues that we should use government agencies “as tools for accomplishing missions, not as cost-comparison overseers.” She adds, “Federal employees should be trained and groomed for completing missions, not threatened with job loss every 5 years.”

Does Privatization Create Savings for the Public?

Privatization proponents often claim that contracting out government work to the private sector leads to savings and better quality. But are those claims justified, or are they mere assumptions? Will privatization lead to lower costs and higher quality even when the privatized service is a monopoly and has no competition to spur better performance?

Price contends that “decisions to outsource since Clinton/Gore have been tainted and should be reviewed to ensure that agencies do not arbitrarily or inappropriately contract out what is public sector work.” Administrations since Bill Clinton’s generally have supported privatization, although George W. Bush’s administration did so with a greater level of enthusiasm than the Obama administration has.

Studies have shown that privatization actually can increase costs. Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors, a 2011 study by the Project on Government Oversight (POGO), compared the cost of work performed by public employees versus private contractors. Among other things, POGO found that private contractors in 33 of 35 classifications cost more than public employees doing the same work, in some cases nearly five times more.

The 2014 Center for Media and Democracy (CMD) report EXPOSED: America’s Highest Paid Government Workers found that top executives of privatized services paid themselves multimillion-dollar salaries by siphoning off hundreds of millions of dollars from privatized public services, including schools, prisons, sanitation, health services, water and roads and by failing to perform the services they were contractually required to provide.

The only way to protect the public from these sorts of abuse is to hire high-quality overseers. However, paying a cadre of people qualified to perform that oversight is not cheap and likely would make the privatized work far more expensive than work performed by public-sector employees.

Identifying the Full Costs of Privatization

It should be no surprise that paying CEOs outrageous salaries will lead to higher costs compared with government services staffed by public employees. In fact, there are many other costs of privatization that often are overlooked. One especially telling example can be found in professor Steven Schooner’s 2004 article on the Bush privatization program (p.17-19). When Professor Schooner examined the effects of downsizing IRS auditors, he found that cutting less than 20 percent of the workforce had led to a 50 percent reduction in productivity of the contract workers.

While some might cheer for that result, the downsizing was expensive for the public. It meant less money collected for the US Treasury and more incentive for people to evade tax laws and paying the taxes they owed.

The next part of this series will examine how the Circular A-76 privatization process affected employees at Sheppard Air Force Base.